[Federal Register Volume 89, Number 164 (Friday, August 23, 2024)]
[Rules and Regulations]
[Pages 68086-68090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-18620]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1026
Truth in Lending (Regulation Z); Consumer Protections for Home
Sales Financed Under Contracts for Deed
AGENCY: Consumer Financial Protection Bureau.
ACTION: Advisory opinion.
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SUMMARY: This advisory opinion affirms the current applicability of
consumer protections and creditor obligations under the Truth in
Lending Act (TILA) and its implementing Regulation Z to transactions in
which a consumer purchases a home under a ``contract for deed.'' When a
creditor sells a home to a buyer under a contract for deed, that
transaction will generally meet TILA and Regulation Z's definition of
credit. Where the transaction is secured by the buyer's dwelling, the
buyer will also generally be entitled to the protections associated
with residential mortgage loans under TILA.
DATES: This advisory opinion is applicable as of August 23, 2024.
FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory
Implementation & Guidance Program Analyst, Office of Regulations, at
202-435-7700 or at: https://reginquiries.consumerfinance.gov/. If you
require this document in an alternative electronic format, please
contact [email protected].
SUPPLEMENTARY INFORMATION: The Consumer Financial Protection Bureau
(CFPB) is issuing this advisory opinion through the procedures for its
Advisory Opinions Policy.\1\ Refer to those procedures for more
information.
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\1\ 85 FR 77987 (Dec. 3, 2020).
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I. Advisory Opinion
A. Background
The CFPB is issuing this advisory opinion to affirm the
applicability of certain consumer protections under the Truth in
Lending Act (TILA) and its implementing Regulation Z to transactions in
which a consumer purchases a home under a ``contract for deed.''
Broadly speaking, TILA protects consumers engaged in credit
transactions by requiring creditors to disclose information about the
costs and terms of the credit, and, where the credit is secured by the
consumer's dwelling, provides additional protections. The CFPB has
previously identified certain contracts for deed as consumer credit
under the Consumer Financial Protection Act (CFPA),\2\ which uses a
substantially similar definition of credit. Consistent with that
earlier application of the CFPA, this advisory opinion clarifies how
the CFPB understands the current application of TILA and Regulation Z
to contracts for deed.
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\2\ Consent Order, In re Harbour Portfolio Advisors et al., CFPB
No. 2020-BCFP-0004 (June 23, 2020), ] 4.
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1. Contract for Deed Overview and History
A contract for deed is a type of home loan, alternatively called a
``land contract,'' ``land installment contract,'' ``land sales
contract,'' ``bond for deed,''
[[Page 68087]]
``agreement for deed,'' or ``buying on contract.'' Home loans commonly
referred to as contracts for deed, which this advisory opinion refers
to as ``contracts for deed,'' tend to have a few key features. In a
typical contract for deed, a homebuyer agrees to make periodic payments
to the home seller, and the seller retains the deed to the property
until the loan is fully repaid.\3\ Loan terms vary but often range from
5 to 30 years and may include balloon payments. Properties are often
purchased ``as is,'' without inspection or appraisal, and may have
property condition issues that prevent them from being suitable for
rental or qualifying for mainstream mortgage financing. Additionally,
because the sales price of the home may not be tied to appraisal or
other typical market measures, the sales price may be inflated. During
the repayment period, the buyer has the exclusive right to occupy the
home and often assumes many of the responsibilities of homeownership,
including paying for taxes, insurance, home maintenance, and
repairs.\4\
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\3\ More complex arrangements exist, such as those where the
buyer pays the seller's agent.
\4\ See Joint Center for Housing Studies of Harvard University,
The American Dream or Just an Illusion? Understanding Land Contract
Trends in the Midwest Pre- and Post-Crisis (Aug. 2019), https://www.jchsharvard.edu/sites/default/files/media/imp/harvard_jchs_housing_tenure_symposium_carpenter_george_nelson.pdf.
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Another common feature is a forfeiture clause that can be triggered
if the borrower fails to meet the terms of the contract. In these
scenarios, the contract is canceled, the seller retakes possession of
the property, and the buyer generally forfeits their entire
investment--including their downpayment, principal payments, and any
increase in home equity, including home equity that the buyer generated
by making property improvements.\5\ In some contracts, a single missed
payment is enough to trigger these losses. Forfeiture clauses can also
be triggered by breaches unrelated to payment status, such as when a
borrower fails to pay taxes, is unable to obtain or maintain insurance,
or does not make improvements to the property within a specified
timeframe.\6\ While some states restrict forfeiture and require
foreclosure, others have allowed ``virtually unrestricted use of
forfeiture clauses.'' \7\
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\5\ Id.
\6\ Id.
\7\ See The Pew Charitable Trusts, Summary of State Land
Contract Statutes (Apr. 30, 2021), https://www.pewtrusts.org/-/media/assets/2022/02/summary-of-state-land-contract-statutes.pdf.
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2. TILA Legislative History
Congress first enacted TILA, 15 U.S.C. 1601 et seq., in 1968
intending ``to assure a meaningful disclosure of credit terms'' and
``avoid the uninformed use of credit, and to protect the consumer
against inaccurate and unfair credit billing and credit card
practices.'' \8\ As industry commenters noted at the time, TILA's
disclosure regime could help ``a prospective mortgage borrower [ ]
consider the relative costs of credit offered by . . . various purchase
arrangements, for example, contract for deed or an FHA-insured
mortgage'' when purchasing a home.\9\
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\8\ 15 U.S.C. 1601.
\9\ Truth in Lending Act: Hearings Before the Subcomm. on
Financial Institutions of the S. Comm. on Banking and Currency, 90th
Cong., 1st Sess. (Apr. 18, 1967) (testimony of Darrel M. Holt,
Mortgage Bankers Association of America).
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In 1994, Congress amended TILA by enacting the Home Ownership and
Equity Protection Act (HOEPA) to require special disclosures and
restrictions for high-cost mortgage loans secured by the consumer's
principal dwelling.\10\ In the wake of the 2008 financial crisis, in
which widespread mortgage loan defaults produced a wave of foreclosures
and systemic economic instability, Congress passed the Dodd-Frank Wall
Street Reform and Consumer Protection Act (Dodd-Frank Act) which added
additional protections to TILA, as well as establishing the CFPB under
the Consumer Financial Protection Act.\11\
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\10\ 15 U.S.C. 1602(bb), 1639.
\11\ Public Law 111-203, 124 Stat. 1376 (2010).
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New TILA sections added by the Dodd-Frank Act required creditors to
make good-faith assessments of consumers' ability to repay loans
secured by their dwellings, imposed new standards on mortgage
disclosures, and prohibited certain practices, including mandatory
arbitration clauses and waivers of Federal causes of action in consumer
credit transactions secured by a dwelling.\12\ The Dodd-Frank Act also
expanded the scope of HOEPA coverage and protections. In the Senate
Report accompanying the Dodd-Frank Act, Congress cited the
``proliferation of poorly underwritten mortgages with abusive terms,''
made ``with little or no regard for a borrower's understanding of the
terms [ ], or their ability to repay,'' as precipitators of the
financial crisis and motivation for the Act's financial reforms.\13\
Congress explained that, because of failures in consumer protection,
``millions of Americans have lost their homes,'' \14\ and quoted expert
testimony that ``a plague of abusive and unaffordable mortgages and
exploitative credit cards . . . cost millions of responsible consumers
their homes, their savings, and their dignity.'' \15\
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\12\ Sections 1411, 1412, and 1414 of the Dodd-Frank Act,
codified at 15 U.S.C. 1639c; sections 1418, 1420, 1463, and 1464 of
the Dodd-Frank Act, codified at 12 U.S.C. 2605; 15 U.S.C. 1638,
1638a, 1639f, and 1639g. Other protections apply to servicing
practices, such as prompt payment processing, no pyramiding of late
fees, and loan originator qualification requirements. See 12 CFR
1026.36(c), (d), (f).
\13\ S. Rept. No. 176, 111th Cong. (2010), at 11, 12.
\14\ Id. at 9.
\15\ Id., n.19 (quoting Testimony of Michael Barr, Assistant
Secretary of the Treasury for Financial Institutions, to the Senate
Committee on Banking, Housing, and Urban Affairs, July 14, 2009).
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B. Legal Analysis
1. Because contracts for deed allow buyers to acquire property and
defer the payment, contracts for deed are generally ``credit'' under
TILA and Regulation Z.
a. Credit Under TILA
TILA's definition of ``credit'' includes the typical contract for
deed. TILA and Regulation Z define credit as ``the right granted [by a
creditor to a debtor] to defer payment of debt or to incur debt and
defer its payment.'' \16\ TILA and Regulation Z do not define debt.
Used infrequently in the statute and the regulation, ``debt'' for the
most part appears only in the definition of ``credit.'' As the CFPB has
noted elsewhere,\17\ in the ordinary usage, debt means simply
``something owed,'' without any obvious limitation.\18\ Legal
dictionaries, including those dating to the enactment of TILA,
similarly describe debt as a ``sum of money due by certain and express
agreement'' or ``a financial liability or obligation owed by one
person, the debtor, to another, the creditor.'' \19\ This understanding
of ``debt,'' as any obligation by a consumer to pay another party,
applies to contracts for deed in a straightforward manner.
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\16\ 15 U.S.C. 1602(f), 12 CFR 1026.2(a)(14). Whether a seller
is a ``creditor'' under TILA and Regulation Z depends on several
factors, discussed below, at section I.B.3.
\17\ Proposed rule, Truth in Lending (Regulation Z); Consumer
Credit Offered to Borrowers in Advance of Expected Receipt of
Compensation for Work, 89 FR 61358 (July 31, 2024), https://files.consumerfinance.gov/f/documents/cfpb_paycheck-advance-marketplace_proposed-interpretive-rule_2024-07.pdf.
\18\ Debt, Merriam-Webster, https://www.merriam-webster.com/dictionary/debt (last updated Jan. 30, 2024).
\19\ Debt, Black's Law Dictionary (4th ed. 1968) (defining debt
as ``[a] sum of money due by certain and express agreement; as by
bond for a determinate sum, a bill or note, a special bargain, or a
rent reserved on a lease, where the amount is fixed and specific,
and does not depend upon any subsequent valuation to settle it'');
Debt, Wex, https://www.law.cornell.edu/wex/debt (last updated Sept.
2021).
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[[Page 68088]]
In a typical contract-for-deed transaction, as discussed above, a
debt is created by the buyer receiving exclusive possession of the
property, along with certain ownership obligations, at the outset of
the contract in exchange for the obligation to repay the agreed-upon
value of that property over time.\20\ Courts applying common law
doctrines have broadly recognized these property-related rights and
obligations under the contract for deed as constituting a grant of
equitable title to the buyer.\21\ In exchange for these rights granted
in the property, the purchaser agrees to complete payment on a deferred
basis. The contractual obligation to repay the agreed-upon value of the
property according to the terms of the contract, therefore, constitutes
a debt under TILA. From the face of the typical contract for deed, it
will be clear that the seller has granted to the purchaser ``the right
. . . to defer'' payment of this debt.
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\20\ This is distinct from lease-based rental arrangements, even
those involving an eventual right to purchase (often called ``lease-
to-own''), because the lessee's legal interest, privileges, and
obligations in the property are more limited in scope, while the
lessor retains both ownership obligations and title. Many lease-to-
own products also require a separate agreement to effectuate a
purchase option, allowing for complete performance of the original
contract without necessarily transferring property ownership. In a
typical contract for deed, complete performance includes the
transfer of full legal ownership. Regardless of how the arrangement
is styled, courts have generally looked to the function of the
transaction and intent of the parties to determine its nature. See,
e.g., Gilliland v. Port Auth. of City of St. Paul, 270 NW2d 743, 747
(Minn. 1978) (``To break the transaction into two separate parts, a
sale and a lease, would be to distort its real nature and to ignore
the intent of the parties.''); In re Montgomery Ward, L.L.C., 469
B.R. 522, 529 (Bankr. D. Del. 2012) (``Courts must analyze the
`economic reality' of the agreement at issue to determine its true
nature.''). Depending on their terms, such leases, as well as
contracts for deed, may be considered ``credit sales'' covered under
TILA and Regulation Z. 15 U.S.C. 1602(h); 12 CFR 1026.2(a)(16).
\21\ In re Restivo Auto Body, Inc., 772 F.3d 168, 177 (4th Cir.
2014) (``upon contracting to buy land, `in equity the vendee becomes
the owner of the land, the vendor of the purchase money' '')
(internal citation omitted); Hauben v. Harmon, 605 F.2d 920, 925
(5th Cir. 1979) (``Under the doctrine of equitable conversion a
purchaser of realty becomes seized of beneficial title to the
property upon execution of the contract of sale.''); In re
Blanchard, 819 F.3d 981, 985 (7th Cir. 2016) (``Under Wisconsin's
doctrine of equitable conversion, a land contract buyer obtains
equitable title to the property, which includes `all the incidents
of a real ownership.' '') (internal citation omitted); Redevelopment
Agency of City of Stockton v. BNSF Ry. Co., 643 F.3d 668, 678 (9th
Cir. 2011) (``The doctrine of equitable conversion generally
provides that when a valid executory land sales contract is entered
into, the purchaser becomes the equitable owner of the land.''); In
re Hodes, 402 F.3d 1005, 1011 (10th Cir. 2005); SMS Assocs. v. Clay,
868 F. Supp. 337, 340 (D.D.C. 1994), aff'd, 70 F.3d 638 (D.C. Cir.
1995). Even where some courts have declined to view a contract for
deed as transferring equitable title, they nonetheless acknowledge
that the purchaser has received possession in exchange for the
promise of payment. See, e.g., In re Wall Tire Distributors, Inc.,
110 B.R. 614, 618 (Bankr. M.D. Ga. 1990).
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b. Closed-End Credit
Where the property acquired under a contract for deed is purchased
by a consumer primarily for personal, family, or household purposes, as
it generally is when a purchaser buys a home using a contract for deed,
the transaction is ``consumer credit'' under Regulation Z.\22\ Any
consumer credit that is not open-end credit under Regulation Z is
considered ``closed-end credit.'' \23\ Because the typical contract for
deed is contemplated as a one-time transaction, it is not open-end
credit.\24\ Thus, when a buyer purchases a personal dwelling from a
creditor under a contract for deed, that transaction typically meets
the definition of closed-end credit under TILA and Regulation Z, and is
subject to the applicable requirements of subpart C of Regulation Z.
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\22\ 12 CFR 1026.2(a)(12).
\23\ 12 CFR 1026.2(a)(10).
\24\ 12 CFR 1026.2(a)(20).
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c. Consistency With Other Laws
In 2020, the CFPB settled with an entity selling property under
contracts for deed, requiring penalties for violations of the CFPA.\25\
In doing so, the CFPB applied the CFPA's substantially similar
definition of credit, which is ``the right granted by a person to a
consumer to defer payment of a debt, incur debt and defer its payment,
or purchase property or services and defer payment for such purchase.''
\26\ This advisory opinion therefore affirms the consistency with which
the CFPB views and applies these statutory definitions, when presented
with similar contexts. Although this advisory opinion does not analyze
the application of other laws, the CFPB expects that under other
consumer financial laws with similar definitions of credit, the same
considerations will apply.\27\
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\25\ Consent Order, In re Harbour Portfolio Advisors et al.,
CFPB No. 2020-BCFP-0004 (June 23, 2020), ] 4.
\26\ 12 U.S.C. 5481(7). A court validated the CFPB's authority
to investigate the entity's contracts for deed as possible credit
under the CFPA, noting that the transactions may be credit because
they ``obligate the purchaser to pay a principal sum plus interest
through deferred monthly payments.'' CFPB v. Harbour Portfolio
Advisors, No. 16-014183, 2017 WL 631914, at *3 (E.D. Mich. Feb. 16,
2017). The court further characterized an acceleration clause that
``gives the seller the option to demand the full purchase price once
the purchaser misses a payment'' as ``strongly suggest[ing] that
Respondents are supplying `credit' . . . .'' Id.
\27\ See, e.g., 15 U.S.C. 1691a(d) (defining ``credit'' under
the Equal Credit Opportunity Act); 12 CFR pt. 1002 supp. I para.
2(j)-1 (``Regulation B covers a wider range of credit transactions
than Regulation Z.'').
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2. Contracts for deed secured by a dwelling, generally will be
``residential mortgage loans'' under TILA and Regulation Z.
Several provisions of TILA and Regulation Z apply specifically to
credit transactions secured by the consumer's dwelling or by real
property.\28\ As discussed above, Congress amended TILA through the
Dodd-Frank Act with the recognition that, when consumers commit to
loans secured by possession of their homes, the stakes are particularly
high.\29\ It added to TILA specific protections that apply to
``residential mortgage loans.'' Many States define ``mortgages''
separately from their definitions for contracts for deed, with distinct
requirements for each. However, in TILA Congress defined ``residential
mortgage loan'' to include ``any consumer credit transaction that is
secured by a mortgage, deed of trust, or other equivalent consensual
security interest on a dwelling or on residential real property that
includes a dwelling, other than a[n open-end] consumer credit
transaction . . . .'' \30\ Thus, the relevant consideration for
determining whether contracts for deed are ``residential mortgage
loans'' under TILA is not whether State law specifically regards
contracts for deed as ``mortgages,'' but only whether the contract for
deed is secured by a mortgage, deed of trust, or other equivalent
consensual security interest on a dwelling or on residential real
property that includes a dwelling. Additional protections under
Regulation Z apply to ``any consumer credit transaction secured'' by
``a dwelling,'' \31\ by ``the consumer's principal dwelling,'' \32\ or
by ``real property.'' \33\
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\28\ The CFPA similarly has provisions specifically addressing
loans secured by real estate. See, e.g., 12 U.S.C. 5514(a)(1)(A)
(providing supervisory authority over any covered person who
originates consumer loans ``secured by real estate''). This advisory
opinion does not assess the applicability of such provisions beyond
TILA, but the CFPB expects to apply such definitions consistently
across Federal consumer financial laws to the extent appropriate.
\29\ See supra, text accompanying notes 13-15.
\30\ 15 U.S.C. 1602(dd)(5).
\31\ E.g., 12 CFR 1026.43(a). Regulation Z defines a
``dwelling'' as ``a residential structure that contains one to four
units, whether or not that structure is attached to real property.''
12 CFR 1026.2(a)(19).
\32\ E.g., 12 CFR 1026.32(a)(1).
\33\ E.g., 12 CFR 1026.19(e). Under Regulation Z, a ``dwelling''
does not need to be attached to real property. 12 CFR 1026.2(a)(19).
Thus, there may be instances where, depending on the transaction, a
contract for deed is secured by a dwelling, but not real property,
or by real property without a dwelling.
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Regulation Z defines a ``security interest'' as ``an interest in
property that
[[Page 68089]]
secures performance of a consumer credit obligation and that is
recognized by State or Federal law.'' \34\ While State and Federal law
regarding secured transactions and contracts for deed will vary, the
CFPB expects that this definition would be satisfied in many or most
cases. As a matter of general usage, security is the ``[c]ollateral
given or pledged to guarantee the fulfillment of an obligation.'' \35\
As described earlier, in a typical contract for deed, the seller
retains legal title to the subject property, which generally allows the
seller to retake possession of the property should the purchaser
default on the payment agreement. In function, this retention of title
serves to ensure that the purchaser, who already has exclusive
possession of the property, fulfills the payment obligations.\36\ The
CFPB notes that this structure is functionally equivalent to common
definitions of ``mortgage,'' \37\ and is aware of State laws that
expressly consider such transactions to be mortgages.\38\
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\34\ 12 CFR 1026.2(a)(25).
\35\ Security, Black's Law Dictionary (11th ed. 2019).
\36\ See Restatement (Third) of Property (Mortgages) sec. 3.4
(1997) (``A contract for deed is a contract for the purchase and
sale of real estate under which the purchaser acquires the immediate
right to possession of the real estate and the vendor defer delivery
of a deed until a later time to secure all or part of the purchase
price. A contract for deed creates a mortgage.'').
\37\ Id. See also Mortgage, Black's Law Dictionary (11th ed.
2019) (``A conveyance of title to property that is given as security
for the payment of a debt or the performance of a duty and that will
become void upon payment or performance according to the stipulated
terms.''); Restatement (Third) of Property (Mortgages) sec. 1.1
(1997) (``The function of a mortgage is to employ an interest in
real estate as security for the performance of some obligation.'').
\38\ See, e.g., Florida (Fla. Stat. Ann. sec. 697.01); Indiana
(Ind. Code Ann. sec. 24-4.4-1-301(14)); Oklahoma (Okla. Stat. Ann.
tit. 16 sec. 11A).
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The CFPB is additionally aware of many instances nationwide in
which a seller's retention of legal title to the property has been
characterized as securing payment of the contract for deed, either by
State statute \39\ or by courts applying State law and equitable
principles.\40\ While this advisory opinion does not provide any
specific interpretation or application of State law, the prevalence of
similar language across State law and related jurisprudence informs the
CFPB's expectation that contracts for deed will generally trigger
Regulation Z's thresholds for mortgage transaction protections based on
the security interest in the buyer's home. As noted above, this is the
case whether or not the relevant State or Federal law regards a
contract for deed generally as a ``mortgage,'' or its equivalent,
including for the purpose of forfeiture. Similarly, this advisory
opinion's recognition that contracts for deed are often ``residential
mortgage loans'' under TILA and Regulation Z does not constitute a
determination that they are mortgages under State or other Federal
laws.
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\39\ See, e.g., Maine (33 M.R.S. sec. 481); Maryland (Md. Real
Property Code sec. 10-101); Ohio (Ohio Rev. Code Ann. sec. 5313.01).
\40\ See, e.g., California (Petersen v. Hartell, 40 Cal. 3d 102,
112, 707 P.2d 232, 239 (1985)); Indiana (Vic's Antiques & Uniques,
Inc. v. J. Elra Holdingz, LLC, 143 NE3d 300, 305 (Ind. Ct. App.
2020)); Kentucky (Sebastian v. Floyd, 585 SW2d 381 (Ky. 1979));
Michigan (Barker v. Klingler, 302 Mich. 282, 288, 4 NW2d 596, 599
(1942)); Minnesota (Gagne v. Hoban, 280 Minn. 475, 479, 159 NW2d
896, 899 (1968)); Nebraska (Mackiewicz v. J.J. & Assocs., 245 Neb.
568, 573, 514 NW2d 613, 618 (1994)); Oregon (Bedortha v. Sunridge
Land Co., 312 Or. 307, 311, 822 P.2d 694, 696 (1991)); Pennsylvania
(Anderson Contracting Co. v. Daugherty, 274 Pa. Super. 13, 21, 417
A.2d 1227, 1231 (1979)); Washington (Lanzce G. Douglass, Inc. v.
Dep't of Revenue, 25 Wash. App. 2d 893, 908, 525 P.3d 999, 1007
(2023)); Wisconsin (Larchmont Holdings, LLC v. N. Shore Servs., LLC,
292 F. Supp. 3d 833, 848-49 (W.D. Wis. 2017)).
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3. Creditors selling homes using contracts for deed must comply
with applicable requirements under TILA and Regulation Z.
a. TILA Creditors
Contract for deed sellers have important obligations under TILA and
Regulation Z depending on the nature of the contract for deed and
whether they are ``creditors.'' \41\ For a transaction to be credit
covered under TILA, the seller must be a creditor, and whether a seller
of a contract for deed is a creditor under TILA turns not only on
whether the seller extends credit, but on the characteristics of the
credit and frequency with which the seller engages in such
transactions. First, the credit extended must be either subject to a
finance charge (such as interest or implied interest) or be payable by
a written agreement in more than four installments, not including a
downpayment.\42\ Second, the obligation must be initially payable to
the person, either on the face of the note or contract, or by agreement
when there is no note or contract, in order for that person to be
considered a creditor.\43\ These first two prongs will typically be
satisfied in a contract-for-deed transaction. Contracts for deed are
generally set up to require periodic payments during the term of the
contract--often monthly over the span of years--and thus, require
repayment of more than four installments.\44\ Contracts for deed also
generally are established by a written agreement that lists the title
holder as the payee.
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\41\ 12 CFR 1026.2(a)(17).
\42\ 12 CFR 1026.2(a)(17)(i), 1026.4(b).
\43\ 12 CFR 1026.2(a)(17)(i).
\44\ Further, even if the contract for deed required less than
four installments, often the sales price is inflated such that the
additional profits earned by the seller meet the requirement for
finance charge under Regulation Z.
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Third, a creditor is a person that regularly extends credit.\45\
For purposes of this requirement, a ``person'' is a natural person or
an organization, including a corporation, partnership, proprietorship,
association, cooperative, estate, trust, or government unit.\46\ It may
include, for example, business arrangements where multiple related
subsidiaries of a single organization each conduct contract-for-deed
sales.\47\ Whether a person regularly extends credit will depend on the
frequency with which the person extends credit, as well as the specific
nature of those credit transactions. As described below, Regulation Z
may require as many as 25 transactions or as few as one to be deemed a
person who regularly extends credit, depending on the type of
credit.\48\ This will, in turn, determine the seller's legal
obligations under TILA and Regulation Z.
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\45\ 12 CFR 1026.2(a)(17).
\46\ 12 CFR 1026.2(a)(22).
\47\ See Ward v. Shad, No. 18-CV-01933 (NEB/ECW), 2019 WL
1084219, at *3 (D. Minn. Mar. 7, 2019).
\48\ 12 CFR 1026.2(a)(17)(v). The CFPB is aware that some
contract-for-deed transactions may involve one-time sellers. Where
such transactions are conducted without a broker and/or do not
qualify as ``high-cost'' mortgages, such one-time sellers will not
be creditors under Regulation Z.
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b. TILA Obligations With Contracts for Deed
In general, when a person extends consumer credit more than 25
times, or more than 5 times for transactions secured by a dwelling, in
the preceding calendar year, that person is a creditor under TILA.\49\
Thus, in contract-for-deed sales that are not considered secured by a
dwelling in the relevant jurisdiction, a seller that extends credit
more than 25 times in the preceding or current calendar year will
qualify as a TILA creditor, assuming all other elements of the
``creditor'' definition are met.\50\ In such a case, the contract-for-
deed sale is closed-end credit, subject to TILA and Regulation Z's
general disclosure requirements regarding the key terms of the loan,
including the
[[Page 68090]]
amount financed, any finance charge, and the annual percentage
rate.\51\
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\49\ Id.
\50\ Id. (``A person regularly extends consumer credit only if
it extended credit . . . more than 25 times . . . in the preceding
calendar year. If a person did not meet these numerical standards in
the preceding calendar year, the numerical standards shall be
applied to the current calendar year.'').
\51\ What specific protections and requirement apply will depend
on the particular loan. See 15 U.S.C. 1631, 1632; see also 12 CFR
1026.17-.18.
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If the contract for deed is considered to be secured by a dwelling
by the applicable law in the relevant jurisdiction but is not a high-
cost mortgage loan, the seller will qualify as a creditor if the seller
has extended credit secured by a dwelling more than five times in the
preceding or current calendar year and all other elements of the
``creditor'' definition are met.\52\ In such a case, the seller is
subject to TILA and Regulation Z's general disclosure requirements, as
well as additional mortgage disclosure requirements.\53\ The
transaction would generally also qualify as a residential mortgage
loan.\54\ These transactions are subject to important additional
requirements, including the requirement that a creditor make a
reasonable, good faith determination of the consumer's ability to repay
the loan as well as the prohibition on mandatory arbitration
clauses.\55\ These transactions may also be subject to rules regarding
servicing, origination, and fees under TILA.\56\
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\52\ 12 CFR 1026.2(a)(17)(v) (the person must regularly extend
credit ``more than 5 times for transactions secured by a
dwelling'').
\53\ 15 U.S.C. 1631, 1632; 12 CFR 1026.17-.18; see also 15
U.S.C. 1638; 12 CFR 1026.19(e), 1026.37, 1026.38. Specific
disclosure requirements will depend on whether the dwelling-secured
credit is also secured by real property.
\54\ 15 U.S.C. 1602(dd)(5).
\55\ 12 CFR 1026.43(c); 12 CFR 1026.36(h)(1).
\56\ See generally 12 CFR 1026.36; 15 U.S.C. 1639a, 1639b,
1639e, 1639c(a)-(h). Some provisions only apply if the loan is
secured by the consumers' principal dwelling. See, e.g., 12 CFR
1026.23.
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If the contract for deed is secured by a dwelling and qualifies as
a high-cost mortgage,\57\ a seller who extends credit more than once in
any 12-month period can qualify as a creditor.\58\ A seller who
originates one or more such credit extensions through a mortgage broker
can also qualify as a creditor.\59\
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\57\ A high-cost mortgage is any consumer credit transaction
secured by a principal dwelling and which meets certain conditions
as described in 12 CFR 1026.32. 15 U.S.C. 1602(bb), 1639; see also
12 CFR 1026.31, 1026.32, 1026.34.
\58\ 12 CFR 1026.2(a)(17)(v).
\59\ Id.
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High-cost mortgage transactions will also trigger HOEPA
requirements and protections, including required disclosures.\60\
Specific prohibitions also apply to high-cost mortgages, including a
prohibition on extending high-cost mortgages without written
certification that a consumer has obtained counseling, a prohibition on
opening a plan without regarding a consumer's ability to repay, and
prohibitions on certain fees, among others.\61\
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\60\ 12 CFR 1026.32, 1026.34.
\61\ 12 CFR 1026.34(a)(4) (open-end, high-cost mortgage
repayment prohibitions), 1026.34(a)(5) (pre-loan counseling
requirements), 1026.34(a)(7)-(8), 1026.34(a)(10) (requirements and
prohibitions related to fees).
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Regulatory Matters
This advisory opinion is an interpretive rule issued under the
CFPB's authority to interpret TILA and Regulation Z, including under
section 1022(b)(1) of the Consumer Financial Protection Act of 2010,
which authorizes guidance as may be necessary or appropriate to enable
the CFPB to administer and carry out the purposes and objectives of
Federal consumer financial laws.\62\
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\62\ 12 U.S.C. 5512(b)(1).
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By operation of TILA section 130(f), no provision of TILA sections
130, 108(b), 108(c), 108(e), or section 112 imposing any liability
applies to any act done or omitted in good faith in conformity with
this interpretive rule, notwithstanding that after such act or omission
has occurred, the interpretive rule is amended, rescinded, or
determined by judicial or other authority to be invalid for any
reason.\63\
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\63\ 15 U.S.C. 1640(f).
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Pursuant to the Congressional Review Act,\64\ the CFPB will submit
a report containing this advisory opinion and other required
information to the United States Senate, the United States House of
Representatives, and the Comptroller General of the United States prior
to the rule's published effective date. The Office of Information and
Regulatory Affairs has designated this interpretive rule as not a
``major rule'' as defined by 5 U.S.C. 804(2).
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\64\ 5 U.S.C. 801 et seq.
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The CFPB has determined that this advisory opinion does not impose
any new or revise any existing recordkeeping, reporting, or disclosure
requirements on covered entities or members of the public that would be
collections of information requiring approval by the Office of
Management and Budget under the Paperwork Reduction Act.\65\
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\65\ 44 U.S.C. 3501 through 3521.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-18620 Filed 8-22-24; 8:45 am]
BILLING CODE 4810-AM-P